Contribution of Researchers for Implementation of Social Contract with Respect to Theory of Legitimacy
Topic: Relevance and Application of Social Contract to Legitimacy Theory in Accounting.
Now day’s business entities have continuously utilized their annual reports to deliberately report information which are indentified with respect to social exercises, particularly demonstrating their worry towards regular habitat. Business entities are bringing change in their divulgence arrangement; now business entities are demonstrating social issue, political issue & environmental issue with respect to the execution of the organization.
Theory of Legitimacy defines that business entities are controlled by a contract (social) in which they agreed to perform social activities & in exchange they get power to meet the objectives effectively and efficiently without interference. In today’s time, Legitimacy theory has use of social contract for the purpose of accounting by assuming an imperative part as it give fulfillment that associations’ activities are proper and attractive without hurting the enthusiasm of the general public. Legitimacy theory gives component to comprehend deliberate divulgence made by organization.
Firstly, in Literature review assignment we will do analysis regarding voluntarily disclosure & prospective by business entity, after that we will discuss regarding social contract which exists between society & business organization, then we will see “how theory of legitimacy overlapped positive accounting theory, stakeholder theory & institutional theory. In last, we will summarize with “how business entity can perform legitimately with respect to social contract”.
Patten (1992) assessed the changes done by US oil mills regarding disclosure requirement. According to theory of Legitimacy, increasing entity’s disclosure requirement with respect to oil mills causes overall increase regarding disclosure requirement in the market. According to Thomas Hobbes (1985), in present world, society plays important role in development of business entity, thus demand of society should be fulfilled. Now days, and society’s expectation from business organization has changed. It becomes important for business entity to consider environments issue & social issues now social issues. As per Vogt (2000), theory of Legitimacy is used for “disclosure requirement of business entity with respect to social issues in annual report changed with the passage of time”. He explained that theory of legitimacy is based upon fact that social contract should exists between business entity and society. The social contract explained the explicit & implicit aspects and society’s expectation from business entity. Explicit term is a term which can be explained as: Business entity should fulfill legal requirement which is imposed upon them. Implicit term is a term which can be explained as society’s expectation from organization. He concluded that both “legitimating” & “legitimacy” are distinct from each other. Legitimacy can be defined as situation which exists if business entity’s value matched society’s expectation but legitimating can be defined as process due to which business entity is capable to bee seen as legitimate. Gordon and Deegan (1996) assessed the increase in disclosure requirement have positive impact upon business entity. Disclosure requirement develop the better relationship between business entity & society. Thomas Hobbes presents the theory which is based on social contract. The Social contract can be explained as an agreement which exist between society and business element where business substance plays out its activities. In the social contract 2 angles are secured, one is unequivocal society’s desire from association; another is understood society’s desire from association.
Application of Theory of Legitimacy and Voluntary Disclosure by Business Organization
Association impacts and affected by the general public where it plays out its work. Conventional money related to bookkeeping is not helpful on the grounds that it concentrate on the data need of stakeholder; it maintains a strategic distance from social and ecological revelations. In today’s period it is essential to address the issues of the general public: Saloman (2006). Purposeful corporate social exposure are artistically intervened talks which pass on an “environment of credibility” and are relied on by germane open as depictions of legitimate activities, yields and targets as these were not expeditiously detectable. Voluntarily disclosure selects, resound and upgrade winning societal points and qualities. All the association deliberately reveals “social” data in yearly report. Voluntarily revelations can appear as administration dialog in annual reports of organization/separate disclosure. Chung (1996) – Worldwide detailing activity which is otherwise called Global reporting initiative appeared in 1997. Worldwide revealing activity gives rules to detailing of political, social issue and ecological issue by association. The most recent form of Global revealing activity was appeared in 2003. As a result of this, association gives an account of social issues. Association will choose what they need to report, how can they report, at which level, b association will give detail to general public with respect to social issue.
Reporting format should be based upon Triple bottom line. It is a reporting format which takes the effect of environmental and social performance of entity. Norms and bounds are not strict under theory of legitimacy bounds. That’s why business entity supposed to be aware towards it. Reporting by organization can be assumed as responsibility (duty) of organization instead of demand. Under accountability, responsibility can be of two types. First is to take the action and second one is furnishing report for those steps which are taken by organization’s management. As per ML Defnd (1998), disclosure (financial one) is the technique of entity to manipulate relationship between society and entity. Voluntarily disclosure by organization in yearly report could be used for implementing organization’s legitimating strategies. As per Jo and Kim (2007) voluntarily disclosure has 2 forms; one form is symbolic disclosure whereas another form is substantive disclosure. Under substantive disclosure, entity’s actual changes are shown but under symbolic disclosure entity’s actual changes are not shown, but these disclosures are aligned with society’s expectation and values. In 1920’s few companies were disclosing environmental issue and social issues voluntarily in yearly report furnished by them- Oberman (2000)
As per Botason (1997), researchers examined and assessed the requirement of entities about voluntarily disclosure – comprises the impact of environmental disclosure and social disclosure. O’Donovan (1999)-Researchers examined and analyzed the change in pattern of disclosure requirement. Voluntarily disclosures have dynamic impact upon society & organization as well. To uphold legitimacy in organization, it is important to furnish voluntarily disclosure with respect to environmental issue and social issue in yearly return. According to entity media gives shape to public’s issue and disclosure in annual report provides chance to organization to cover their negative (adverse) media coverage. Organization’s financial performance& application of theory of social contract is important for entity. Walsh (2003), prime motive of ethical reporting & voluntarily disclosure is bringing transparency in system of reporting & society shall be aware regarding activities of entity. Stakeholders of entity have right to get information with respect to organization’s performance.
Voluntarily disclosure accompanied by financial disclosure of entity helps entity to take advantage in market. Voluntarily disclosure is used for getting society’s support by meeting the demands and expectations. As per Burgstahler (1997), under voluntarily disclosure, this is not obligatory for the association to reveal environmental issue and social issue yet in the event that association play out its capacity as per standards & fulfilling society’s need, then unquestionably that organization will get advantage in market’s share. Along these lines, association ought to play out its exercises morally by considering society’s needs and expectation. MH (1996) -Maintainability announcing characterizes that how show exercises of the association are affecting capacities of future era to satisfy their requirements. On the off chance that society needs maintainability detailing from association then for this situation sustainability accounting shall be lined up with theory of legitimacy to accomplish the target of association successfully and productively. By giving data to society with respect to environmental issue, financial and social performance of association, it will assemble the trust in society.
Thomas Hobbes presents the theory which is based on social contract. The Social contract can be explained as an agreement which exist between society and business element where business substance plays out its activities. In the social contract 2 angles are secured, one is unequivocal society’s desire from association; another is understood society’s desire from association. Certain desire can be characterized as ‘desire of the general public from business element”, though express can be characterized as “legitimate necessity” which association need to satisfy to work its business exercises viably and productively.
Peter (2001) explained that: During old days, ‘maximasation of profit” was the only measure to assess the organization’s performance. Profit maximization means that if entity will earn revenue then it will be better. During old days, variant factors were not considered .But in present world society’s expectation from organization has changed. Deegan (2000) – Nowadays, need of society is taken into mind by organization while performing its activities. In today’s time, organization has to do disclosure regarding environmental issue, social issue and political issue in yearly report. It is the responsibility to report “whether activities of organization are in compliance with legal laws (applicable). As per Dechow (1994), organization provides surety to society regarding its compliance with requirement (mainly legal) by fulfilling the society’s expectation. The Social contract describes society’s expectation which could be explicit/ implicit with respect to organization’s non financial performance.
The Society offered authorization to business substance to play out their exercises by satisfying the needs. Association needs to consistence with legitimate, political and social prerequisite. Be that as it may, at times, business association confronts the issue of lawful limitations which are demanded upon them. On the off chance that business association can’t meet contract (social) then it won’t have the capacity to play out its undertaking (operation) successfully and productively. At the point when limitation is tons of business association then it won’t have the capacity to satisfy the request of client, and its piece of the overall industry will decay. As it is important for organization to fulfill society’s expectation because if entity will not fulfill society’s expectation then could lose the share in market and competitor will take advantage of this situation. Social contract plays important role to bring legitimacy in the field of accounting. Contract (social) provides establishment to theory of legitimacy in the field of accounting. Thus, it is important for entity to keep in mind about society’s expectation while doing the operation. According to Hobbes, theory of Social contract explained moral duty of organization towards its society. Hobbes also said that theory of Social contract is same as political theory. During 21st century, implication of contract (social) in theory of legitimacy gained momentum in organization. Theory of Social contract is relied upon morality. Theory of Social contract explains relevant laws and rules which entity has to apply while doing their activities.
Because of existence of contract which is social between organization & society, organization is performing its activities by considering political issue, environmental and social. Existence of social contract between organization & society has positive (favorable) impact upon society. Presently there is greater accountability. It acquires straightforwardness (transparency) the framework. Contract (social) is critical in today’s period as society’s desire is expanding; they need that business association ought to play out their assignment by satisfying their desire. Prior there was just a single sole target of business association, that was benefit augmentation or riches amplification, which implies that expansion the gaining for stakeholders in any capacity by overlooking every single other variable (social element, ecological component and political element). Presently Business association needs to consider the various variables (social component, natural element and political element) while boosting the benefit for stakeholders. This should be reasoned that this is positive stride for the advancement of society all in all. Presently business associations are more responsible and it acquires straightforwardness the framework.
As per Hobbes, social contract’s prime motive is bringing freedom in society. It is said that the society has various rights with respect to expression of views (freedom). Another motive is promoting interest (rational) in society. As per Hobbes, social contract application in theory of legitimacy helps to promote interest of society. Another motive of contract (social) between organization and society is bringing equality in society. Equality is defined as- “equality in human power”, “equality of society’s need” and “Equality f with respect to resources”. Contract (social) has 2 aspects, first aspect- “empirical dimension” and second aspect- “normative dimension”. It raises sovereignty and individual’s interest.
Comparison of Theory of Legitimacy with positive accounting theory, stakeholder’s theory and institutional theory (respect to social contract)
Basically, theory of legitimacy, stakeholder’s theory and positive accounting theory are relied upon the particular system. The prime motive of theories is disclosing relationship between business entity & society with respect to disclosure of non financial information. The organization has influence upon the society where they operate their activities and society also has influence upon business entity. According to Fama (2003), Theory of stakeholder& theory of legitimacy is based upon Political accounting theory.
As per Ullman (1985), framework for political, social and economical issue is provided by political theory. Business entity will not be able to report regarding economic in the absence of political theory. Under this theory, reporting which is done by enterprise is regarding goods which are exchanged among environment & business entity. Political theory can be subdivided into parts. First part is known as classical aspect whereas second part is Bourgeois. The aim of classical part of theory of political is to minimize conflicts in society. According to Friedman (1970)-Social disclosure (reporting) by organization brings transparency with respect to non availability of resources. Another part of theory of political economic does not give attention to society’s conflicts. The aim of bourgeois part of theory of political is to analyze interaction of organization with the society. Both stakeholder theory and theory of legitimacy are established from bourgeois aspect of theory of political economic. There are two branches of Stakeholder theory. One branch is known as ethical branch (also called normative branch). Another branch is known as positive branch (also called managerial branch).
Stakeholder can be defined as group of individuals who have impact upon business entity and vice versa also apply- Reed (1983). Stakeholder’s interest is connected to entity as they are connected to entity. The main aim of this theory is promoting interest of individuals (stakeholders) and avoids conflicts between stakeholders & organization. There are two types of stakeholder, primary Stakeholder of organization and secondary stakeholder of organization: Strawer (2001).
Primary stakeholder’s examples are: employees of organizations and management of organizations. Secondary stakeholder (according to Reed), does not interfere in daily activities of organization. Secondary stakeholders are not engaged in daily activities of organization but Secondary shareholder have impact on business organization. Secondary shareholder of the business entity could be influenced from the operations of entity and business entity could also be influenced from secondary shareholder. A secondary stakeholder example is: shareholders. Organization’s stakeholders do not interfere in daily activities of entity but functions of entity have an impact upon shareholders & vice versa also applied. According to theory of stakeholders’ theory, Stakeholders of the company have legal right to obtain financial as well as non financial information from enterprise with respect to their performance. If Stakeholders of the company ask the organization to provide financial as well as non financial information with respect to performance of the company, then organization should have to provided provide financial as well as non financial information with respect to performance of the company. Information provided by business organization is the “responsibility” of entity. They cannot deny to stakeholder because it is the duty of the entity to provide relevant information. As per Evan & Freeman (1988) – The managerial branch which exists for stakeholders analyzed “whether entity is performing its activities according to stakeholder’s expectations.
Under theory of stakeholder, business entity only considers particular group only whereas in theory of legitimacy, society as whole (complete) is taken by the organization. Theory of Stakeholder has narrow scope whereas theory of legitimacy has wider scope. The reason behind this is that theory of legitimacy takes society as whole but theory of stakeholder considers “certain group of individuals”. Thus, it could be concluded that theory of legitimacy overlapped theory of stakeholder, besides both legitimacy theory & stakeholder theory are established from theory of positive economic: Ownes (1996)
Theory of stakeholder consist two parts; first part is “ethical” and the second part is managerial. Business organization’s management is regulated by ethical aspect & managerial aspect of theory of stakeholder. Sometimes, theory of positive accounting has comparison with theory of Legitimacy. Contract (social) provides foundation with respect to theory of legitimacy. Theory of Legitimacy does not base upon the assumptions (mainly assumptions regarding economic).As per the assumptions based upon economic, all facts are regulated by maximization of profit but theory of positive accounting is relied upon certain principles- Starks (2003). It could be concluded that theory of legitimacy is wider with respect to terms and it also provides complete view of organization whereas theory of positive accounting is narrow with respect to terms and it does not provides complete view of organization. Factors which are not cost are ignored by Theory of Positive accounting whereas these factors (non-cost) are considered by theory of Legitimacy, so that business organization can operate its activities by fulfilling society’s expectation and need. Theory of Legitimacy brought transparency in business organization’s system. It could be said that theory of Legitimacy overlapped theory of positive accounting: Hamilton (1993).
Theory of Institutional provides linkage among practices of entities & social values. In theory of institutional theory, organization is more inclined towards uniformity. According to DiMaggio and Powell (1983), institutional theory has two parts. Isomorphism is the first part and decoupling is the second part of institutional theory. Isomorphism aspect of theory of institutional can be explained as the process which limits power of one segment in society to match balancing segments which faces same type of natural (environmental) issues.
In isomorphic aspect (institutional theory), there are three processes .First aspect is “coercive”, second aspect is “mimetic” & “normative” is the third aspect. Coercive is a process which is same as managerial aspect of theory of stakeholder theory. Under coercive process (isomorphism), organization changes its daily practice because of the pressure put by stakeholder upon enterprise. Strong Stakeholders have expectation from distinctive entity as well: Healy (1999). In isomorphism’s mimetic process, business entity takes relevant ideas from competitor to get advantage over the competitor and this will helps to reduce risk with respect to uncertainty in entity. In the process of normative for isomorphism, people particularly make pressure upon organization to implement practice according to them. Decoupling is the next aspect of next part of theory of institutional .under decoupling of institutional theory, business organization’s manager founds the need for implementation of practice, and it could be different from present (applicable) practice of entity. Thus, it is concluded that theory of legitimacy overlapped theory of institutional: Malin (2006). Theory of Legitimacy plays important role in present world. Theory of Legitimacy plays vital role for society’s development (whole). Theory of Legitimacy helps organization to fulfill their goal efficiently & effectively by meeting society’s expectation, by following relevant rules imposed upon organization under contract (social).
E.L (1970) assessed the changes done by US oil mills regarding disclosure requirement. According to theory of Legitimacy, increasing entity’s disclosure requirement with respect to oil mills causes overall increase regarding disclosure requirement in the market. Theory of Legitimacy is a verified process. Most of the researchers assessed requirement of environmental, social and political disclosure in organization. Examples with respect to empirical studies (regarding theory of legitimacy).According to Thomas Hobbes (1985), in present world, society plays an important role in development of business entity, thus demand of society should be fulfilled. Now days, and society’s expectation from business organization has changed. It becomes important for business entity to consider environments issue & social issues now social issues. As per Rankin, Vogt (2000), theory of Legitimacy is used for “disclosure requirement of business entity with respect to social issue in annual report changed with the passage of time”.Lindblom (1994) explained that theory of legitimacy is based upon fact that social contract should exists between business entity and society. The social contract explained the explicit & implicit aspects and society’s expectation from business entity. Explicit term is a term which can be explained as: Business entity should fulfill legal requirements imposed upon them. Implicit term is a term which can be explained as society’s expectation from organization. O’Donovan (1999) explained that: business entity makes assumption that media plays an important role as it gives shape to public’s concern and disclosure of report annually provides advantage to business entity to cover itself from negative (adverse) media coverage. Relationship which exists between financial performance and social contract is important for business organization .Deegan (2002) concluded that both “legitimating” & “legitimacy” are distinct from each other. Legitimacy is explained as “situation” which exists if business entity’s value matched society’s expectation but legitimating can be defined as process due to which business entity is capable to be seen as legitimate. Deegan and Gordan (1996) assessed the increase in disclosure requirement have positive impact upon business entity. Disclosure requirement develop the better relationship between business entity & society. Theory of Legitimacy provides relationship between society’s expectation & Organization’s disclosure requirement. In 1920; some business entities were reporting voluntarily disclosure with respect to non financial performance. Voluntarily disclosure effect is dynamic: Oberman (2000). The main focus of theory of Legitimating theory is upon social contract. Theory of legitimacy defines the “business entity’s responsibility towards society”. Contract (social) provides establishment to the theory of legitimacy.
From above, it is concluded; all different type of theories plays an important role for society’s development and development of business enterprise. Implication of theory varies with the circumstances in which organization is performing its activities. Theory of legitimacy overlapped positive theory, stakeholders’ theory & institutional theory. The social contract is very important with respect to theory of legitimacy. Theory of legitimacy with respect to social contract helps to bring transparency in whole system and it helps in the society’s development (whole) in different ways which are discussed earlier.
Organizations ought to act genuinely by giving applicable data to the general public and by satisfying their desire. When business organization acts legitimately, in that case business entity can effectively achieve the goals. T. Lang (1995) explained that acting legitimately with respect to social contract provides advantages to business entity over competitor.Business entities are bringing significant changes with respect to disclosure policy. These days business entities are demonstrating social issue, Political issue &environmental issue in regards to the execution of the substance. According to Estry (2003) now day’s business entities have continuously utilized their annual reports to deliberately report information which are indentified with respect to social exercises, particularly demonstrating their worry towards regular habitat. Business organization provides surety to society in which they perform their activities that they are complying with society’s expectation. Social contract is a contract which defined society’s expectation (and explicit & implicit) & how organization should perform their activities. Contract (social) is most important with respect to legitimacy in the field of accounting. Social contract gives establishment to theory of legitimacy in bookkeeping. In this way, it winds up plainly critical for association to consider society’s request while playing out its activities.
Conclusion
From above talk, it should be reasoned that contract (social) gives establishment to the theory of Legitimacy. Significance of revelation of social data, ecological data has been addressed. From most recent two decades, association have logically utilized their annual reports to willfully report information indentifying with respect to social exercises, particularly demonstrating their worry towards indigenous habitat. Associations are bringing change regarding their divulgence strategy, in present they are demonstrating Political issue, social issue & ecological issue in regards to the execution of the organization. Presently in view of contract (social), exists amongst entity and society, element play out their operations after considering political issues, ecological issues and social issues. Application of legitimacy theory has positive effect in the general public all in all. Presently there is greater responsibility. It gets straightforwardness the framework. Contract (social) is essential in today’s time as desire of the society is expanding; they need that business association ought to play out their undertaking by satisfying their desire.
Theory of legitimacy overlapped positive accounting theory, stakeholder theory & institutional theory which is examined previously. Use of contract (social) in theory of legitimacy gets straightforwardness the framework and helps general public all in all from multiple points of view as talked about above. It can be said that contract (social) contributes in advancement of society all in all.
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